Unlike the Federal Reserve and the European Central Bank, the BoE does not forecast a stabilization of interest rates.
Predictably, the Bank of England raised interest rates by 0,25% at their July meeting. Borrowing costs in the United Kingdom have reached 5,25%, the highest level since the 2008 crisis in the fastest tightening policy in the country’s recent history.
After Germany, the United Kingdom is the worst-performing economy in the G7, with terrifying inflation and economic stagnation. Consumer prices in the UK are the highest of any developed economy at 7,9%; while GDP growth stalled in June and is expected to grow as low as 0,5% in 2023 and 2024.
On the other hand, the UK economy appears very resilient to rate hikes. By comparison, Germany has already fallen into recession despite a lower inflation rate. In any case, Germany’s case is worsened by its proximity to the Russia-Ukraine war and its previous dependence on Russian gas, whose absence is now eroding German industries.
But the UK’s economy has stagnated since the Brexit referendum in 2016 and has yet to recover from pre-pandemic levels. Though growth occurs, preventing recession, it’s extremely slow and is eroding the UK’s competitiveness.
Mortgage rates, like borrowing costs, have hit 15-year highs. The Bank of England predicts a fall in housing investment by 5,75% in 2023 and 6,25% in 2024. Moreover, the BoE predicts a rise in unemployment to 4,8% by late 2025.
Inflationary assessment
The Bank of England was not unanimous about its 25-basis point hike on Wednesday. According to the follow-up statement, two members wanted a 0,5% hike while one wanted to keep rates stable, fearing the tightening policy was happening too fast.
However, the Bank concluded that inflation was not falling fast enough to allow for stabilization. Last year, the UK’s highest inflation point was 11,1%, while the EU’s was 9,2%. Today, the UK’s inflation is at 7,9% while the EU’s is at 5,5%: the gap is widening.
British Prime Minister Rishi Sunak pledged in January to cut inflation in half by the end of the year. According to current estimates, it will be a challenging goal to achieve at the current pace.
The BoE’s 2% target will only be reached in the second quarter of 2025, much later than in other developed economies. Unlike the American Federal Reserve and the European Central Bank, the Bank of England has not laid out a plan for rate stabilization or rate cuts.
"The MPC will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target," said the BoE statement, adding that "some of the risks of more persistent inflationary pressures may have begun to crystallize."
